Skip to comments.Why Stocks Are Surging as Jobs Disappear (Dow is up, Jobs are down, what gives ?)
Posted on 10/16/2009 8:00:56 AM PDT by SeekAndFind
Stocks are up. Jobs are down. So if you're an investor you're enjoying a vibrant recovery and if you're a worker it still feels like a grinding recession.
Since bottoming out in March, the stock market has soared by about 60 percent, one of the most awesome rallies in market history. The Dow Jones Industrial Average cracking 10,000 may not be strategically significant, but it's a psychological breakthrough that's worth cheering after the demoralizing crash that preceded it.
While the Dow has been racing upward, however, the unemployment rate has also skyrocketed, from 8.5 percent in March to 9.8 percent now. The economy has lost 7.2 million jobs since the recession began at the end of 2007, and the trend is still going the wrong way. The unemployment rate will almost certainly hit 10 percent and hover near there for awhile in 2010, before gradually declining.
So are job losses good for the stock market? Actually, yes. At least for awhile. Stocks are rising because many companies are earning more money than analysts have expected. But earnings aren't up because companies are selling more stuff; most companies are still selling less stuff and grappling with falling revenue. Instead, earnings are rising because companies have cut their costs more than revenues have fallen. And "costs" are often the same as "jobs." Consider these snippets from some recent earnings reports:
Johnson & Johnson. Third-quarter revenue was down 5.3 percent but net earnings rose 1.1 percent.
Domino's Pizza. Third-quarter revenue down 6 percent; net earnings up 77 percent.
Abbott Labs. Third-quarter revenue up 3.5 percent; net earnings up 36.5 percent.
Pepsi. Third-quarter revenue down 1.5 percent; net earnings up 9.5 percent.
Alcoa. Third-quarter revenue up 9 percent, compared with the second quarter; net earnings swung from a $459 million loss to a $124 million profit.
All of those companies have laid off workers over the last two years, probably necessary to keep the company healthy. And it's worth keeping in mind that when earnings outperform revenue, it's a sign that the company is well-run (assuming there's no Enron-style hocus-pocus). But CEOs also know that you can't grow a company or keep juicing the stock price by cutting costs and slashing jobs. Real growth only comes from new customers, new business, and increased revenue. And on that measure, the outlook is murky for the stock and job markets both.
The same workers who have been getting laid off, improving the cost profile for many companies, are also consumers running out of money to spend. Some are going bankrupt, defaulting on bank loans, and losing their homes. That's a major risk to corporate profitsand stock pricesdown the road.
Some companies will be able to coast for awhile. The weak dollar and relatively strong economies in Asia and parts of Europe and South America, for example, are good news for U.S. exporters, since it helps them offset weak U.S. sales with stronger business overseas. And more-efficient companies can withstand lean times longer. But most American companies still rely on American consumers to keep business humming. Sooner or later, the U.S. job and stock markets need to go in the same direction.
The question is whether the job market will hitch onto the coattails of the stock market, with companies starting to hire as their fortunes improveor stocks will turn south as the ranks of the unemployed swell. Good thing workers and investors both have become familiar with uncertainty.
Wall St. likes a streamlined work force.
From the accounting view of that question: Jobs are expenses and expenses cut into margin, thus decreasing profits. Increased profits mean that the stock price increases.
it was a crime against humanity when GWB was president. it must be okay now.
Here’s what those people who are always screaming “tax the corporations more! They can afford it!” don’t understand.
Almost every corporation can find someone to cut to save their profits. More than likely, it’ll include those with a sense of entitlement vs. those with the work ethic.
“Why Stocks Are Surging as Jobs Disappear (Dow is up, Jobs are down, what gives ?)”
And nobody is suspicious....
No wonder a pvunk like hussein can rise to stardom!
Simple really, a company is not just going to bend over and say ‘oh well, I guess we’ll fail’. No, they modify their business plan to work within the conditions they play. They streamline workforces, reduce expenses, and change product focus.
If you owned a video store, for example, and the market started crashing, you wouldn’t just bend over and take it? You would look for ways to save money. You would possibly change price structures to meet the customer’s economic circumstances, etc. You would still look for a way to make a profit.
This is one of the reasons why I’m not a complete doomer on the future of the economy. As long as there are still sectors that big brother doesn’t get his nose in much more, and they can attempt to make a profit, they will modify behavior in order to maintain profitability.
Part of it is inflation, but it is mostly that investors do not have any other place to go to try to make money with the kind of liquidity that the stock market has.
There is no “real” value in the stock prices. They are vulnerable to a deep crash. I’m about ready to move my 401K to safer ground.
Where did all those TARP and STIMULUS dollars go?
A not-so-Merry Christmas is on the horizon.
There will be lots of breast beating and face reddening before it’s over. But no one at this point will be very surprised.
From an accounting standpoint, yes. They always have been.
Uhhhh, because the government printed up and doled out trillions of dollars from the taxpayer's treasury to Wall Street after they were absurdly permitted to call themselves "banks".
Where did all those TARP and STIMULUS dollars go?
Much of it went to off-shore bank accounts. I beleive.
same questions were asked prior to the 29 crash.
By December 2008 I think there was a general fear that there the potential for an historic collapse of the U.S. and world economic system. That was a reasonable fear that was, IMHO, promoted by the media and the incoming Obama Administration in order to provide a basis for the pork-laden Stimulus Bill. By January my personal view and I think the financial markets view was that it was going to be bad but that the sky was, in fact, not falling. The Stock market had fallen too far and too fast. So a correction was inevitable. If you recognized that fact in that time-frame and acted on that belief you made out like a bandit. I suspect many of Obama's closest friends did so.
With the wage czar deciding what people can earn, expect some of our most ambitious people to seek their fortunes in freer markets around the world. The next Bill Gates has probably made up his mind, “not here.”
Exactly! Wall Street can point to companies and say “they’re lean” and “they cut overhead”. Another factor is low inflation. I suspect one reason inflation hasn’t taken off - yet - is because of the high unemployment.
Employees are an expense to a business. They are an expense a business cannot do without, as they generate income.
An employee who does not contribute significantly to a business, however, is an expense that should be eliminated.
It seems to me that many businesses have used this financial downturn to lay off or fire the people that were not top notch workers. Many found out that the best job security was to do a good job and make yourself a valued employee.
An efficient, streamlined workforce increases profit.
They also like government bailouts.
Depends on which employees you're talking about. In good times, companies carry the doofus nice guy because they CAN. Whether they should or not is another question, but everybody likes him and he doesn't do any harm. That one's an expense, not a contributor. In BAD times, DNG's out the door.
I was told yesterday that my resume is "too strong". That must be the new euphemism for "overqualified".
There is no way in hell that unemployment rates for accountants are under 5%.
These short-term gains in profit are only that. As we are given more of the poison that got us here in the first place [higher taxes, more regulations, bigger government], the long-term effects will be felt.
The Obama administration and its sycophants in the media can try to spin this and hope that hope will keep it going, but the current stock upsurge is unsustainable. Certainly it will not last when the mid-term elections come next year.
Yes. More customers means more profits. More employees mean less profits.
There is a tradeoff of course, if you are getting lots more customers, you might need more employees to serve the demand.
But without customers, employees are obviously just an expense. And the situation for all these companies with lowered revenues is that customers aren't coming in the door. In that case, having employess sitting on their thumbs waiting for customers is just an expense.
1. Large corporations do fine under national socialism. Lots of big companies made lots of money under the Nazis. It’s the start ups and small companies that cannot prosper.
2. Stocks are not going up; the dollar is going down.
The dramatic increase in productivity that computers have brought have allowed people to do more work in a shorter period of time, particularly in accounting, shipping and warehousing, and marketing.
The layoffs have been a sort of correction in the workforce, which is good news in a way. On the other, if your not skilled in computers and don't have an aptitude for multitasking, you're going to have a harder time finding and keeping a position in an office environment.
Also bank CD’s are coming due and the renewal rate is less than 1%. People see the stock market as a better return so they foolishly invest, driving up the market.
Yes they’re an expense if the company isn’t selling enough product to cover the employees wages. By keeping a larger than needed work force, they’re going down the path General Motors took. How did that work out?
This jump in the Dow will be short lived. There are too many indicators that the economy is in bad shape
Of course, Business Socialism, thru bailouts and other programs, have only temporarily helped stocks. They will go down again, and it will be ugly
When over 2/3 of the economy is consumer-spending, and 10% of consumers have no income....the thing will collapse.
Main Street is hurting, regardless of what the liberals on Wall Street, and their syncophants, think
Stocks are rising because a lot of people are gambling, hoping to make back some of the money they’ve lost since the Dow went south from 14,000.
People who have been in the market for the past few months have done well. But, trankly, the market looks pretty toppish to me right now.
On the income statement, yes they are considered expenses. Why do you think all that outsourcing happened? We can all thank Jack Welsh for coming up with that idea. All be it, they are dead wrong with that thought process, but that is the way today’s execs think.
I learned a new term recently: "sucker boom".
This is the “sucker’s rally” that is designed to pull in money from the little guys so that the big guys can take it off the table.
You are right. The economy has already collapsed but it has been papered over by a massive amount of useless paper backed by nothing. The G20 has just approved the replacement of the greenback by the euro and the yen. This is a complete cover up of what has gone on behind the scenes. CO
No jobs, no spending, the stock market will be going down cause companies will not be able to sustain the earnings.
In the most simple explanation supply/demand curves for many businesses shifted where sales dropped and therefore earnings dropped. Employers trimmed their payrolls to decrease their expenses and started showing increased earnings therefore the value of the stockmarket rises.
I suspect that in this horrible job market, productivity (among those still working) is way up.
I think the press has really hyped this whole thing to hysteria. There are jobs out there for people who are specializing and have good practical job skills. It’s nasty out there, but not impossible. I fully understand that people have lost their shirts, but with few exceptions it’s mainly the idiots who overextended themselves.
American companies are still way too bloated, while many productive employees have lost their jobs and/or have not been replaced, few if any of the 6 to 7 figure dead weight positions like "Senior vice president for global support services, Director of Communications for the East Coast, Vice President of Mission Related Services, Vice President of Administrative Services, etc, etc have lost theirs.
MBAs take care of their own and unfortunately they will drive the company right out of buisness before they go anywhere.
I own several businesses and I’m in my 20’s. What you call “ageism” is really, in many cases, a reflection of changes in the free market and technology.
I’d love to hire older workers. But the reality is:
2.) Most of my employees and friends are part of what sociologists call the “buster” generation (29 and under). Two of my most brilliant coders, guys who have made me millions of dollars, are gay. I’ve known them forever and they’ve been together since they were 18 years old, so almost 10 years. As a general rule (although this is not always the case), younger people have no problem assimilating into the culture and working with a diverse group of colleagues. We provide them with the best technology, designer coffee, huge discounts to our other family of companies, on-site video games so they can take breaks and play for as long as they want, and flexible work hours. They just want people that get the job done, have fun, and have the opportunity to get rich. People of older generations tend to have a problem with the fact that no one cares these dudes are gay, or if I let one of the secretaries have pink hair. (It’s like they expect us to get offended and when we don’t, get angry - my grandmother thinks I’ve lost my mind but then she wonders why I was able to build a company that made as much profit 4 years out of college as she did in 25 years of 18 hour days. It’s not hard: Hire the best people. Period. If you hire the winners, they are competitive by nature and your company will prosper.) In other words, if I think that an older worker is going to have a problem with my gay employees, or my non-conformist employees, they aren’t getting a callback. For the office to function, the culture has to be enjoyable and no one should feel like they’re going to have to defend who they are when they show up in the morning.
I really don’t think the older generation has any idea how out of touch they are in terms of culture, business, and personal freedom. I mean, we had one CEO of a major vendor stop in a couple of years ago and he couldn’t believe we “wasted our time” playing video games - how on Earth were we successful? (Yet, if we had been spending the same length of time playing golf or drinking at a bar, he wouldn’t have thought twice about it. When I showed him the numbers that the video game industry dwarfs Hollywood in revenue, he was shocked.)
Welcome to FR.
If there was a older technical person who was over 50 who realizes that he needs to re-train himself to use newer technologies ( and then actually does that on his own, going to school to learn them for instance ) who applied to your company and was willing to take a significant pay cut from what he was used to simply to get out of unemployment and be a productive worker again, would you hire him ? ( Let’s say he doesn’t mind working with gays who play video games or girls with green hair ).
I've worked for companies like his. They are the best, bar none. If you are fortunate enough to be with a firm like that, you want to work hard because you don't feel like you're being used. It doesn't feel like a "job". Counter-intuitively, this increases productivity. Such firms do make millions, and the older generation is viewed as stiltedly stodgy and needlessly formal.
WallStreetCapitalist is spot-on, and deserves our admiration. Your lowbrow comment indicates how out of touch you are, and is indicative, I believe, of a broad-based problem in the conservative movement.